TOP FIVE REASONS PEOPLE GO BANKRUPT

Bankruptcy Filings in America Alarming

Over the past few decades, we have seen the rise in the bankruptcy statistics in America and they are alarming. The number of people who are unable to pay off their debts is staggering.  Congress recently addressed the issue with legislation, making it hard to qualify or file for bankruptcy.

In a recent Harvard study the top five are as follows:

1.    1. MEDICAL EXPENSES

The study indicates that 62% of all personal bankruptcies, medical expenses are at the top of the list. Interestingly enough, the study also showed that 78% of filers had some form of health insurance, thus eliminating the myth that this only affects the uninsured.

For sure, serious diseases or injuries can result in hundreds of thousands of dollars in medical bills that quickly wipe out any savings or retirement, collect funds, or home equity accounts. Once all the sources available are wiped out, bankruptcy may be the only shelter left whether or not a patient or his family were able to apply health coverage to a portion of the bill.

2.     
        2. JOB LOSS

Whether due to downsizing, layoff, termination or resignation, the loss of one’s job can be devastating. A few are fortunate to receive severance packages, usually equal to 3-months of one’s salary. However, many may find pink slips on their desk or lockers or called into the office after giving a full day’s work to be informed they are being let go without any prior notice. If one does not have an emergency fund to draw from (usually at least 6-months of earning saved) this only worsens the situation and many start using credit cards to pay bills which is pulling the noose tighter and only prolonging the inevitable.

The loss of health insurance coverage and the high cost of COBRA insurance also drain the all ready limited resource any job seeker might have.  Job seekers unable to find employment for an extended time period may not recover from the lack of income to keep the creditors from hounding them.

3.    3.  POOR/EXCESS USE OF CREDIT

We see this a lot as some people simply can’t control their spending. They are the buy now, got-to-have-it and keep up with the Jones type. Credit card bills, installment debt, car and other loan payments can eventually accelerate to where they are out of control and eventually the borrower is unable to make even the minimum payment on each type of debt. If a borrower has no means to obtain a debt-consolidation loan, then bankruptcy is usually the alternative.

Overall the statistics show that most debt-consolidation plans fail for various reasons and usually only delay filing for those found in this situation. A home-equity loan can be a good remedy for unsecured debt in a few cases; once it is exhausted, irresponsible borrowers can face foreclosure on their homes if they are unable to make this payment as well.

4.    4.  DIVORCE/SEPARATION

Divorce creates tremendous financial strain on both partners. The top strain are the legal fees, which in some circumstances can be astronomical, followed by the division of marital assets, decree of child support and/or alimony, and the ongoing cost of keeping up two or more separate households after the split. In most cases the legal costs alone are enough to force some to file, while garnishment of wages to cover back child support or alimony can strip the ability to pay the rest of their bills. Spouses who fail to pay the support dictated in the agreement often leave the other completely destitute.

5.     5. UNEXPECTED EXPENSES

Loss from theft or casualty such as earthquakes, fires, floods or tornadoes, for which the owner is not insured can force some into bankruptcy. Many homeowners are not aware that they must take out separate coverage for certain events such as earthquakes. Those who do not have coverage for these types of peril can not only lose their homes but most of their possessions as well. They face the future with having to not only pay to replace the items but also find immediate food and shelter. Those who lose their wardrobes in such a catastrophe may not be able to dress appropriately for their work, which could cost them their jobs.

The choices to declare bankruptcy are many. But in most cases, common sense, sound financial planning and preparing for the future can head off this mounting problem before it become a reality. Those who are facing this possibility should seek a credit counselor or financial planner before choosing this alternative. Bankruptcy should be the last option.

Based on article from Investopedia article by Mark P Cusssen.  Edited and written by ShirLee McGarry.